Clear Eyed Capitalist

Archive for August, 2017

I recently did a quick consultation with a friend of a friend who is an independent personal service provider. She has a reasonable hourly rate, though it’s not clear every client pays that. She’s independent because she likes the schedule flexibility, but it does mean her schedule is often not full. Looking at past taxes, her annual gross income has been 50-55K annually. It’s below the the median wage of 64K, but well above the living wage of $26,600. Or is it?

The two common challenges for small providers are 1) bookkeeping and 2) marketing. She knew her business worked on a cashflow basis but was talking to me because some months cash was feeling a little tight. After pulling some numbers together, it became apparent that her monthly expenses are almost $2000/month with rent, internet, phone, website, licensing, continuing ed, insurance, credit card processing and taxes. Lots of those are expenses that don’t come out every month, but add up. They’re also largely fixed expenses. So really, that gets her down to just above living wage as a take home.

We talked about a few marketing strategies – how she might get more referrals or remind existing customers about her service and maybe sprucing up her waiting lobby (though that’s a capital investment). It turns out it’s tricky to relocate or sublet her specific space so it’s difficult to chip away at those fixed costs. One solution she employs is some of her clients pay in cash. That contributes to difficulty in understanding her real profitability. I notice in my own efforts to hire a housekeeper that the first two have asked that I pay them in cash. Is this one of the signs the economy is not working for everyone? That those who can, go informal? Looking at risks – did I mention health insurance? She has to pay her own health insurance and that is a big chunk of those monthly expenses. It’s a significant risk to a small payer and there’s little help for her at a living wage.

Thinking about the risks of healthcare got me thinking about the risk of a major health disruption. Medical issues are the number one cause of bankruptcy in the US. It’s also another way the relatively rich stay richer – property protections in bankruptcy. If you are a property owner, you can protect some of your property in bankruptcy, and thus some of your assets. If you are a renter, and you don’t own tangible property, you’ve got nothing that you can protect, so it strikes me it’s much more likely you’ll be forced into homelessness. In fact, when I google for data to support this, what I learn is that a bankruptcy on your record is one of the things that can come up in a tenant screening and affect your ability to get a lease!

Net – there is no net, not of the safety kind. My provider just has to have faith in the continuity of her business (her track record to date is reassuring). A little effort in presentation or marketing might literally pay off. We also need to hope Obamacare and eventually medicare stay there for her, and that she doesn’t have a major health crisis that impacts her ability to work.

My takeaway for individual service providers is that it’s important to break the habit of letting personal & business expenses blur together – a habit that the tax reporting on Sole Proprietorships supports. You need to separate your business from your personal expenses, and track true monthly costs. You need to add up all those periodic one-time costs and figure out a monthly amount so you know your bottom line and not get lulled into complacency by your top line.